The Promise & Perils of Plain English Mutual Fund Disclosures

In this Article, we examine the content and compliance of mutual fund summary prospectuses. Fund disclosures are subject to `plain English' requirements promising to make disclosures accessible to ordinary investors and level the investment playing field. Despite recent SEC regulations intending to simplify disclosures for the average investor, we find that disclosure length is growing with risk sections nearly doubled in size over the last decade. A variety of readability and complexity measures also show that the summary prospectus—the disclosure most intended for the consumer investor—is not written in plain English but is hard to read. Our findings have broad policy implications, exposing potential peril for ordinary investors. We also explore the impact of fund disclosures on fund performance including monthly returns and risks (volatility and diversification). A two-way fixed effect regression analysis with interaction terms establishes a relationship between readability, fund performance, and volatility. Risk and strategy sections embed different information signals. Readability effects on fund return and volatility change from negative to positive moving from the risk to the strategy section models. Further, non-boilerplate derivative disclosures mute strategy section readability effects indicating semantic complexity necessitated by complex investment strategies, whereas high risk section readability is bloating and obfuscation